Asian Analysis

Singapore: Hitting the Wall

1998

Professor James Cotton

Singapore's recession is now official, due to the region's continuing economic troubles. At the same time, new and serious differences within ASEAN present additional problems for Singapore.
On June 30, Singapore's Finance Minister, Richard Hu, announced a S$2 billion extra-budget package to stimulate the economy, at the same time conceding that the region's economic troubles were now expected to have a major impact on the city-state. The package included measures to lower business costs, bring forward public construction projects to stimulate local demand, and offer a boost to the collapsing property market by halting government sales of land. Altogether, these measures will result in a budget deficit of about S$800 million, the first since the slowdown of the mid-1980s. At the same time it became apparent that the nation's growth had now slowed to the point where a contraction in the economy was expected before the end of the year, thus demonstrating that earlier estimates of 3.5 per cent growth were excessively optimistic.
The cause of the slowdown can be traced to the Asian economic turmoil. Singapore's trade volume is expected to decline by about 5 per cent in 1998. This will be due largely to the poor performance of most regional economies. Vital markets in Malaysia, Japan, Hong Kong and South Korea for consumer and capital goods have contracted, and with Indonesia still in free fall, transportation has also been seriously affected. Nor are there any prospects of tourism rescuing the national revenues, with the number of tourist arrivals diminishing by about 20 per cent in the past 12 months.
In the longer term, further steps in the continued slow liberalization of banking and financial services can be expected, but in a nation which has prided itself on tight regulation and fiscal rectitude, more radical expedients are unlikely. Nevertheless, the full picture of the exposure of Singapore's banks to Indonesia is not yet available, and this may generate additional uncertainties. While cushioned by the absence of sovereign debt and in possession of large foreign reserves, Singapore's open economy is uniquely vulnerable to the regional and international climate.
Meanwhile, the future of regional cooperation remains a problem. The July ASEAN foreign ministerial meeting focussed on Thai attempts to introduce new internal norms in the conduct of the organisation's affairs, badly disrupted by enlargement and fallout from the financial crisis. There were some signs that Singapore was unhappy with ASEAN's enlargement in 1997 and, in recent times, there have been domestic demands for direct intervention with key actors in Indonesia to deal with the 'haze' (pollution) problem.
These demands have been given a new urgency by the conflict that accompanied the collapse of the Soeharto government, during which many Chinese were the victims of violence. But it is clear that this move to a more intrusive ASEAN regime has alienated the present government of Malaysia. Given that improved relations with its nearest neighbours was the rationale for Singapore playing such an active part in ASEAN, its leaders have been forced to walk a fine line. At a time when the region's economic integration is being undermined, its political solidarity has also become open to question.

WATCHPOINT: How serious will the Singapore recession be? And what further difficulties will emerge in Singapore's relations with others in ASEAN?

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